The HMRC introduced IR35 at the turn of the millennium in order to stop the flow of contractors working as disguised permanent employees. A disguised employee can be defined as a employee who contracts through a limited company, but would typically be an employee if the limited company was not used. The contractor benefits from the monetary & tax advantages of a contractor, but does not take any responsibility of running a limited company.

If a contractor is to be suspected to be inside of IR35 by HMRC, they will have to pay income tax & National Insurance like a regular company employee. This has great implications on a contractor, as their take home pay will be significantly reduced.

Whether you are inside or outside of IR35, it has long been a hot topic amongst the contracting & self-employed community. The majority of self-employed contractors should have no concerns over IR35, but it is worth checking our guides on inside or outside IR35 or our IR35 checker, if you have any concerns about your contracting status.

When and Why was IR35 introduced?

The IR35 legislation was proposed in 1999, but came fully into the effect in April 2000 as a part of the Finance Act of 2000. HMRC introduced the legislation in order to combat so-called ‘disguised employees’. These types of employees will typically contract through a limited organisation, but do not take on the responsibilities -and pay significantly less income tax & National Insurance.

IR35 was introduced for a variety of different reasons. Businesses found it beneficial when employing the self-employed via limited companies as it allowed them to bypass paying National Insurance Contributions (NIC) for said employees. Additionally, by hiring contractors, it enabled the company to not offer the same employee rights & benefits a standard employee would receive. 

For contractors & self-employed, by setting up as your own limited company, you avoid paying the high rate on income-tax which is placed upon normal employees. 

How does IR35 Work?

IR35 is underpinned by various bits of employee legislation and case law, which has been developing ever since its introduction in 2000. HMRC will run a ‘test of employment’ in order to determine whether an one individual limited company can be turned into an employee.

A HMRC Inspector will be asked to investigate your contract with said client. Typically, HMRC will disregard any written contract or agreement you have will the client and will look at the ‘real’ relationship with your limited company and your client. The results of this is a ‘notional contract’.

The HMRC will use the results of this ‘notional contract’ to determine whether your contract with said client falls inside or outside IR35. 

The in’s & out’s of this process are long, complex and challenging for anyone who is not an expert in UK employment law. The IR35 legislation is infamously known for being not as ‘watertight’ as it should be, which has resulted in numerous contractors being left in the dark of their employment status. Therefore it’s vital for each IR35 case to be treated on a case-by-case basis. 

Here at Nixon Williams, we have been dealing with IR35 cases for nearly twenty years. If you are looking for expert advice, consultation and for our dedicated IR35 to look through your employment contract thoroughly and correctly, get in touch with us at 01253 843181 or via e-mail at newbusiness@nixonwilliams.com